Council Examining Practices for Outsourcing Plan Services

In an issue statement, the council notes
that certain functions by their nature must be outsourced to a third party,
while others are outsourced for practical reasons, but there is an emerging
trend toward also outsourcing functions that have traditionally been exercised
by plan sponsors or other employer fiduciaries, including functions such as
investment fund selection, discretionary plan administration and investment
strategy. In addition, the council says, there’s an emerging trend towards
using multiple employer plan structures as a mechanism to “outsource” the
provision of retirement plan benefits particularly in the small company market.

According to the council, outsourcing plan services presents
questions about the allocation of legal responsibilities and risk for
activities of service providers on behalf of plans, including responsibilities
imposed by the Employee Retirement Income Security Act (ERISA) and
responsibilities allocated and risks assumed service contracts. The council
contends the allocation of responsibilities and risk is not always well
understood by plan sponsors and other employer fiduciaries and they may
misunderstand what their legal responsibilities continue to be when services
are outsourced.

“While the Department of Labor (DOL) has issued guidance in
several areas regarding both plan sponsor and service provider
responsibilities, there is no uniform analytical framework for understanding
outsourcing, particularly in the context of fiduciary services,” the council
says in its issue statement. The council intends to draft recommendations to
the Secretary of Labor for consideration.

It says its examination will focus on:

Identifying
current industry practices and trends regarding the types of services
being outsourced (both fiduciary and non-fiduciary) and the market for
delivery of those services, including differences in outsourcing practices
by type of provider, plan size or plan type;

Clarifying
the legal framework under ERISA for retaining outsourced service
providers, including both plan sponsor and service provider
responsibilities, and suggest areas where further DOL guidance might be
helpful;

Making
recommendations to DOL about current best practices in selecting and
monitoring outsourced service providers, including identification of
performance standards, benchmarking of costs and mitigating conflicts of
interest;

For
fiduciary services, exploring the differences between status as a
fiduciary under ERISA section 3(16), 3(21) and ERISA section 3(38) and the
scope of co-fiduciary liability in the outsourcing context;

Identifying
current contracting practices with respect to outsourced services,
including provisions such as termination rights, indemnification,
liability caps, service level agreements, etc. that might assist plan sponsors
and other fiduciaries in negotiating service agreements; and

Examining
insurance coverage and ERISA bonding practices of outsourced service
providers to assist in understanding the extent to which risks are shifted
from plan sponsors and other fiduciaries to service providers.

The American Benefits Council (ABC) urged the ERISA Advisory
Council to avoid adding an additional layer of complexity for retirement plan
sponsors.

“We respectfully request that the DOL take caution to not
add another layer of complexity related to plan sponsors’ decisionmaking as it
pertains to the procurement of plan-related services from suppliers and vendors
who reside outside the company,” Allison R. Klausner, assistant general counsel
for benefits, Honeywell International Inc., said in testimony before the
council, speaking on behalf of ABC.

“The Council would support DOL initiatives with regard to
outsourcing work relating to the delivery of employee benefits, but only so
long as it is not one that limits the freedoms of the plan sponsor to make
corporate decisions that fit its corporate culture and the personality and
needs of its workforce,” she added.

Klausner
told the council about the process Honeywell uses to select outsourcing
providers, but noted while the system works well for her firm, every company is
different. “Any government initiative in this area should permit continued
flexibility for American companies as they provide benefits to their workers
and retirees in an effort to support their collective health and financial
well-being,” she said.